A week packed with data and decisions

You wouldn’t know, by looking at the S&P 500’s performance on Friday, that a US regional bank was having a rough time. Almost a year into last year’s regional bank crisis and about a month after a first post-earnings free-fall, the New York Community Bancorp – a commercial real estate lender in New York - fell more than 25% on Friday after saying that it discovered ‘material weaknesses’ in the way it tracks loan risks. The bank wrote down the value of the companies it bought years ago and changed its leadership to deal with the problems. Interestingly, the NY Community Bancorp’s free-fall didn’t really impacted sentiment elsewhere, the KBW’s bank ETF closed the session near flat, the S&P500 rose to a fresh record, its 15th fresh record since the year began, Nasdaq 100 advanced to a fresh record as well, even the small cap index closed the week at an almost 2-year high. While the US regional banks which have a large exposure to commercial real estate sector – which, in turn, is in trouble due to the pandemic hit to activity in commercial real estate and higher interest rates – are still seen on a slippery ground, the Federal Reserve’s (Fed) ability to contain last year’s mini-banking crisis, the efficiency of its liquidity tools and credibility it gained are certainly why the New York Community Bancorp’s issues are taken as a separate case by investors and don’t spill over to the rest of the market.

So, besides for the NY Community Bancorp, Friday was a record-breaking day for major US indices. Stocks in Europe also closed the week on a high note, while the Japanese Nikkei hit a fresh record, at 40'000, before giving back advance early Monday. But news from Europe on Friday weren’t fully soothing for the market bulls. Inflation in euro-area fell last month but not as much as expected. Headline inflation eased from 2.8% to 2.6% versus a fall to 2.5% penciled in by analysts, while core inflation eased from 3.3% to 3.1%, and not to 2.9% as expected by a consensus of analyst estimates on a Bloomberg survey. The higher-than-expected inflation read revived the European Central Bank (ECB) hawks. ECB’s Robert Holzmann couldn’t contain himself in the pre-meeting quiet period and slipped a ‘we have to wait, we cannot rush to a decision’ regarding the rate cuts. The ECB is expected to maintain its policy rates unchanged at this week’s meeting; all eyes and all ears will be on any minor changes in the communique and forecasts. While the morose economic outlook in the region calls for an ECB action, inflation could be a drag to any concrete hint. The ECB has a single mandate – and that’s price stability. Therefore, the ECB won’t cut rates before making sure that inflation is headed toward its 2% target. June looks like the earliest mark for a concrete action.  

The EURUSD bounced back above the 100 and 200-DMA after having spent some time below these levels last week. If there is one thing, it is that Europe needs rate cuts more than the US does. European economies’ softer growth outlook should limit the euro’s upside potential against the greenback. I think that price rallies are interesting opportunities for top sellers. The next key resistance stands at 1.0870, the 50-DMA, until the ECB meeting. Unless Lagarde violently pushes back on the rate cut expectations, we should not see the EURUSD record a significant rebound.

In the US, the week will be packed with jobs data and Fed Chair Powell’s congressional testimony. The US economy is expected to have added around 190K new nonfarm jobs, the unemployment rate is seen steady near 3.7% but the wages growth may have slowed in February. Higher job additions and higher pay are inflationary, and should push the Fed cut expectations to an ulterior date, while slower job additions and softer pay rise could pull them forward. The week starts with the expectation that the first Fed cut could come in June with more than a 70% chance assessed to it.

Anyway, if you are willing some stimulus news, you might turn your attention to China’s National People’s Congress. They will likely announce more measures to reach their 5% growth target amid a deepening property crisis and entrenched deflation.

In energy, US crude made an attempt above the $80pb mark on Friday, on rumours that OPEC+ would extend its production cuts to the 2nd quarter. The weekend news confirmed the rumours. The barrel of American crude saw a limited enthusiasm however above the $80pb after the announcement – a sign that OPEC cuts alone won’t keep the price of crude above the $80pb level.